Bearish sentiment puts a dent to window dressing
Stephanie Jacob 
Hong Leong Investment Bank head of retail research Loui Low Ley Yee says there has been a dearth of window-dressing activities in recent months

OVER the past 20 years, global and local equities have often reported positive returns ranging from 70% to 85% in the month of December. Market gains were also strong and often the highest in the final month of the year (see Chart 2).

During that 20-year period, both the MSCI World Equity Index and FBM KLCI Index have registered an average return of 2.4% and 3.5% respectively, according to wealth solutions provider iFAST Capital.

“Known as the ‘December effect’, this phenomenon is driven by the holiday spirit which spills into the market and tends to encourage positive investor sentiment,” iFAST analyst Tan Wei Yine tells FocusM. “This then drives more buying rather than selling and boosts the market overall.”

Aside from retail investors, funds and institutional investors also tend to undertake a common practice known as “window dressing”. This is done as part of their efforts to re-position and re-balance their portfolios ahead of the year-end.

Given that these investors account for significant ownership on the market, their trading activities often have a noticeable impact on the market.


Window dressing

Unlike previous years, however, the general consensus among analysts is that such window-dressing activities have yet to start in earnest in the local capital market.

RHB Banking Group’s head of research Alex Chia observes that window dressing has been minimal with the exception of Dec 5 when the FBM KLCI rallied 0.91% or 11.71 points towards the closing bell to end at 1,724.84.

The overall market strength left a lot to be desired with losers thumping gainers by 624 to 298. A likely conclusion was the rebound was triggered by only a handful of counters – likely blue chip or heavyweight stocks – rather than an across the board phenomenon.

This was proven valid as the KLCI retreated 0.38% or 6.51 points to 1,718.33 the following day due to a lack of follow-through buying interest which was further exacerbated by an overnight decline of US stocks on Wall Street as well as Japan’s Nikkei 225 and Hong Kong’s Hang Seng index which plunged 2% each.

“Amid the prevailing bearish sentiment, any attempt to push up the market would most likely be met with heavy selling,” says Chia.

Echoing a similar view, Hong Leong Investment Bank’s head of retail research Loui Low Ley Yee says there has been a dearth of window-dressing activities in recent months. 

“There has not been any window-dressing activities over the past months,” he observes. “But I believe that the prospect of it taking place is still there given such is the norm during the last few weeks of the year.”

While acknowledging the statistics which show positive gains being recorded in the fourth quarter over the past 20 years, Low nevertheless cautions that this does not mean history will repeat itself.

“What I would say is that there might be a recovery over the final three weeks of the year as a result of window dressing,” he points out.

Low highlights that window dressing tends to focus on KLCI component stocks and points to those in the banking sector as potential beneficiaries.

Lingering questions over when the 14th general election will be called is another reason why investors prefer to stay on the sidelines.

“Everyone is waiting for the elections to be called and that has dampened sentiment in the stock market,” asserts Low. “Based on the past few elections, the markets seem to only start trading at a premium after the general election is completed.”

Given that the elections were expected earlier this year, he points to the likelihood that investors are now tired of the guessing game. For this reason, some may choose to take some profit first.

More broadly, the KLCI which opened the year at 1,635.53 has chalked up a gain of 5.11% based on Dec 7’s closing at 1,719.05 – a sign that the benchmark index remains in a positive territory. This explains the possibility of buyers who entered the market earlier in the year cashing out a portion of their investments as a risk-adverse strategy.

Low anticipates that any buying that will take place over the coming weeks will be more a ‘warm-up” of buying interest rather than huge buying support.

That said, while positive gains are expected in December, experts caution against relying too heavily on historical data or trying to “time” the market.

“Past performances are not a guaranteed indicator of future movements,” reminds iFAST’s Tan. “Additionally, we often caution investors against any attempt to time the market as it is impossible to predict short-term movements in the market.”

Instead, he urges investors to continue monitoring the fundamentals of the market. “They should also stick to their own investment objectives while focusing on investing for the longer term,” he says.

This article first appeared in Focus Malaysia Issue 262.